4 Flashcards
What are ways of paying shareholders
Regular cash dividends
Stock dividends
Stock split
What is regular cash dividends
Cash payment made by a firm to its owners in normal course of business. Usually paid 2 or 4 times a year
What are stock dividends
Payment made by firm to its owners in form of equity, diluting value of each share outstanding
Company issues new stock. E.g. 2% stock dividend – one new share per 50 owned
What are stock splits
An increase in a firms shares outstanding without any change in owners equity
Like stock dividends but dilution is much larger. 3:1 stock split – one share becomes 3 new shares - 1/3 cheaper
What is reverse split
Stock split in which firms number of shares outstanding is reduced
What is trading range
Price range between highest and lowest prices at which an equity is traded
What is declaration date
Board of directors declares payment of dividends
Thursday 15th January
What is Ex dividend date 
Share of equity becomes ex dividend on date seller is entitled to keep dividend, under stock exchange rules, shares are traded ex dividend on and after second business day before record date
Wednesday 28th January
What is record date
Declared dividends are distributable to shareholders of record on a specific date
30th January
What is payment date
Dividend cheques are mailed to shareholders of record
16th February
What does dividend policy refer to
Time pattern of dividend payout
What is share price
Present value of future dividends
What is homemade dividend policy
Tailored dividend policy created by individual investors who undo corporate dividend by reinvesting dividends or selling shares
What are share repurchases
Purchase buy Corporation of its own shares of equity. Also known as buyback. In perfect markets, firm should be indifferent between a share repurchase and dividend payment
What are the 3 approaches to share repurchases
Open market purchases
Tender offer
Targeted repurchase
What is dividend vs repurchase real world considerations
Flexibility – dividends when permanent increase in earnings, repurchases when temporary increase
Undervaluation – repurchase if shares are believed to be undervalued
Taxes – repurchases are tax advantaged compared to dividends
What are real-world factors affecting dividend payout
Low dividend payout:
Taxes
Flotation costs
Dividends restrictions
High dividend payout:
Desire for current income
Tax exempt investors
What is information content of dividends
Markets reaction to change in corporate dividend payout
What is the Clientele effect
Observable fact that equities attract particular groups based on dividend yield and resulting tax effects
What do we know and don’t know about dividend policy
Corporate dividends are substantial
Fewer companies pay dividends
Corporations smooth dividends
Payouts provide information to market
